By: Yosi (Joe) Benlevi VP & Senior Underwriting Counsel Title Insurance and Leasehold Estates a short history The 1975 leasehold policy Covers for increased cost of leasing an alternate space and limited miscellaneous items of loss. Not contemplating leveraged leasing of built to suit projects, ground leases with tenant built to suit projects and sale-leaseback projects The 2001 Leasehold Endorsement the big change New definitions: Eviction, Leasehold Estate, Lease Term Coverage for tenant improvements Coverage for not completed improvements Additional items of damage Reasonable cost to secure replacement lease The 2006 Leasehold Endorsement no co-insurance exception Why should I get title insurance for leasehold estates? Due Diligence Who is the owner? - The true identity of the landlord What can I do on the property? - Covenants and Restrictions that affect the property, noncompete clauses, zoning ordinances, reciprocal easements, maintenance fee obligations Other interested parties? Lenders on the fee estate, tenants, option/rofr holders Can I use the property? - Uninterrupted possession for the entire lease term Economic benefits Additional costs covered under the policy Relocation costs Transportation costs up to 100 miles Reimbursement in case of not substantially completed improvements (including soft costs such as zoning, permits, architect fees, environmental testing) Credit Enhancement for loan transactions!!!! How much insurance is enough? Value of the leasehold estate rent stream or other methods for valuation Difficulties in calculating value of leasehold estate (triple net leases, periodic increase formulas) Value of the improvements useful life (straight-line depreciation), replacement cost or other appraisal techniques Combination of both the value of the leasehold estate and the improvements Ticor Title Insurance Company 711 Third Avenue, Suite 500, New York, NY. 10017 (212) 880-12304 Fax (212) 880-1402
State specific rules CA remaining term under the lease (including options) less than 10 years, less than 25 years and over 50 years NY less than 6 years amount equal to the aggregate of the total rents payable under the lease over 6 years no less than first 6 year rent stream or fair market value of the land and improvements at closing or appraised value of the land and improvements at closing Please remember to Notice issues - recordation of the lease or memorandum thereof Estoppels from landlord Lease in full force and affect No rents due No defenses Full copy of lease and amendments attached Characterization of improvements as owned by tenant during the term of the lease State specific transfer tax issues (e.g. NY, MD, CT, DE) For lender to consider Subordination, Non-Disturbance and Attornment Agreements (SNDA) Characterization of improvements as owned by tenant during the term of the lease or use of the loan funds for construction of improvements Exhibit A Leasehold Endorsement (owner) Page 2 of 9
EXHIBIT A ALTA 13-06 LEASEHOLD ENDORSEMENT (OWNER) 1. As used in this endorsement, these terms shall mean the following: a. "Evicted" or "Eviction": (a) the lawful deprivation, in whole or in part, of the right of possession insured by this policy, contrary to the terms of the Lease or (b) the lawful prevention of the use of the Land or the Tenant Leasehold Improvements for the purposes permitted by the Lease, in either case as a result of a matter covered by this policy. b. "Lease": the lease agreement described in Schedule A. c. "Leasehold Estate": the right of possession for the Lease Term. d. "Lease Term": the duration of the Leasehold Estate, including any renewal or extended term if a valid option to renew or extend is contained in the Lease. e. "Personal Property": chattels located on the Land and property which, because of their character and manner of affixation to the Land, can be severed from the Land without causing appreciable damage to themselves or to the Land to which they are affixed. f. "Remaining Lease Term": the portion of the Lease Term remaining after the Insured has been Evicted as a result of a matter covered by this policy. g. "Tenant Leasehold Improvements": Those improvements, including landscaping, required or permitted to be built on the Land by the Lease that have been built at the Insured's expense or in which the Insured has an interest greater than the right to possession during the Lease Term. 2. Valuation of Estate or Interest Insured If in computing loss or damage it becomes necessary to value the Title as the result of a covered matter that results in an Eviction of the Tenant, then that value shall consist of the value for the Remaining Lease Term of the Leasehold Estate and any Tenant Leasehold Improvements existing on the date of the Eviction. The Insured Claimant shall have the right to have the Leasehold Estate and the Tenant Leasehold Improvements valued either as a whole or separately. In either event, this determination of value shall take into account rent no longer required to be paid for the Remaining Lease Term. 3. Additional items of loss covered by this endorsement If the Insured is Evicted, the following items of loss, if applicable, shall be included in computing loss or damage incurred by the Insured, but not to the extent that the same are included in the valuation of the Title. a. The reasonable cost of removing and relocating any Personal Property that the Insured has the right to remove and relocate, situated on the Land at the time of Eviction, the cost of transportation of that Personal Property for the initial one hundred miles incurred in connection with the relocation, and the reasonable cost of repairing the Personal Property damaged by reason of the removal and relocation. Exhibit A Leasehold Endorsement (owner) Page 3 of 9
b. Rent or damages for use and occupancy of the Land prior to the Eviction that the Insured as owner of the Leasehold Estate may be obligated to pay to any person having paramount title to that of the lessor in the Lease. c. The amount of rent that, by the terms of the Lease, the Insured must continue to pay to the lessor after Eviction with respect to the portion of the Leasehold Estate and Tenant Leasehold Improvements from which the Insured has been Evicted. d. The fair market value, at the time of the Eviction, of the estate or interest of the Insured in any lease or sublease made by Tenant as lessor of all or part of the Leasehold Estate or the Tenant Leasehold Improvements. e. Damages that the Insured is obligated to pay to lessees or sublessees on account of the breach of any lease or sublease made by the Tenant as lessor of all or part of the Leasehold Estate or the Tenant Leasehold Improvements caused by the Eviction. f. Reasonable costs incurred by the Insured to secure a replacement leasehold equivalent to the Leasehold Estate. g. If Tenant Leasehold Improvements are not substantially completed at the time of Eviction, the actual cost incurred by the Insured, less the salvage value, for the Tenant Leasehold Improvements up to the time of Eviction. Those costs include costs incurred to obtain land use, zoning, building and occupancy permits, architectural and engineering fees, construction management fees, costs of environmental testing and reviews, and landscaping costs. This endorsement is issued as part of the policy. Except as it expressly states, it does not (i) modify any of the terms and provisions of the policy, (ii) modify any prior endorsements, (iii) extend the Date of Policy, or (iv) increase the Amount of Insurance. To the extent a provision of the policy or a previous endorsement is inconsistent with an express provision of this endorsement, this endorsement controls. Otherwise, this endorsement is subject to all of the terms and provisions of the policy and of any prior endorsements. Exhibit A Leasehold Endorsement (owner) Page 4 of 9
EXHIBIT B ALTA 13-06 LEASEHOLD ENDORSEMENT (LOAN) 1. As used in this endorsement, these terms shall mean the following: a. "Evicted" or "Eviction": (a) the lawful deprivation, in whole or in part, of the right of possession insured by this policy, contrary to the terms of the Lease or (b) the lawful prevention of the use of the Land or the Tenant Leasehold Improvements for the purposes permitted by the Lease, in either case, as a result of a matter covered by this policy. b. "Lease": the lease agreement described in Schedule A. c. "Leasehold Estate": the right of possession for the Lease Term. d. "Lease Term": the duration of the Leasehold Estate, including any renewal or extended term if a valid option to renew or extend is contained in the Lease. e. "Personal Property": chattels located on the Land and property that, because of their character and manner of affixation to the Land, can be severed from the Land without causing appreciable damage to themselves or to the Land to which they are affixed. f. "Remaining Lease Term": the portion of the Lease Term remaining after the Insured has been Evicted as a result of a matter covered by this policy. g. "Tenant": the tenant under the Lease and, after acquisition of all or any part of the Title in accordance with the provisions of Section 2 of the Conditions of this policy, the Insured Claimant. h. "Tenant Leasehold Improvements": Those improvements, including landscaping, required or permitted to be built on the Land by the Lease that have been built at the Insured's expense or in which the Insured has an interest greater than the right to possession during the Lease Term. 2. Valuation of Estate or Interest Insured If in computing loss or damage it becomes necessary to value the Title as the result of a covered matter that results in an Eviction of the Tenant, then that value shall consist of the value for the Remaining Lease Term of the Leasehold Estate and any Tenant Leasehold Improvements existing on the date of the Eviction. The Insured Claimant shall have the right to have the Leasehold Estate and the Tenant Leasehold Improvements valued either as a whole or separately. In either event, this determination of value shall take into account rent no longer required to be paid for the Remaining Lease Term. 3. Additional items of loss covered by this endorsement If the Insured acquires all or any part of the Title in accordance with the provisions of Section 2 of the Conditions of this policy and thereafter is Evicted, the following items of loss, if applicable, shall be included in computing loss or damage incurred by the Insured, but not to the extent that the same are included in the valuation of the Title. a. The reasonable cost of removing and relocating any Personal Property that the Insured has the right to remove and relocate, situated on the Land at the time of Eviction, the cost of transportation of that Personal Property for the initial one hundred miles incurred in connection with the relocation, and the reasonable cost of repairing the Personal Property damaged by reason of the removal and relocation. Exhibit B Leasehold Endorsement (loan) Page 5 of 9
b. Rent or damages for use and occupancy of the Land prior to the Eviction that the Insured as owner of the Leasehold Estate may be obligated to pay to any person having paramount title to that of the lessor in the Lease. c. The amount of rent that, by the terms of the Lease, the Insured must continue to pay to the lessor after Eviction with respect to the portion of the Leasehold Estate and Tenant Leasehold Improvements from which the Insured has been Evicted. d. The fair market value, at the time of the Eviction, of the estate or interest of the Insured in any lease or sublease made by Tenant as lessor of all or part of the Leasehold Estate or the Tenant Leasehold Improvements. e. Damages that the Insured is obligated to pay to lessees or sublessees on account of the breach of any lease or sublease made by the Tenant as lessor of all or part of the Leasehold Estate or the Tenant Leasehold Improvements caused by the Eviction. f. Reasonable costs incurred by the Insured to secure a replacement leasehold equivalent to the Leasehold Estate. g. If Tenant Leasehold Improvements are not substantially completed at the time of Eviction, the actual cost incurred by the Insured, less the salvage value, for the Tenant Leasehold Improvements up to the time of Eviction. Those costs include costs incurred to obtain land use, zoning, building and occupancy permits, architectural and engineering fees, construction management fees, costs of environmental testing and reviews, and landscaping costs. This endorsement is issued as part of the policy. Except as it expressly states, it does not (i) modify any of the terms and provisions of the policy, (ii) modify any prior endorsements, (iii) extend the Date of Policy, or (iv) increase the Amount of Insurance. To the extent a provision of the policy or a previous endorsement is inconsistent with an express provision of this endorsement, this endorsement controls. Otherwise, this endorsement is subject to all of the terms and provisions of the policy and of any prior endorsements. Exhibit C Work Sheet Page 6 of 9
General lease terms EXHIBIT C WORK SHEET Term of the Ground Lease: 20 years Option under the lease: 5 years Annual rent: $100,000.00 (including option period) Value of improvements: $2,000,000.00 Depreciation: 4% annually Eviction: 5 years into the lease Amount of insurance under the policy: Option I - $2,100,000.00 (value of improvements + one year rent) Option II - $2,500,000.00 (value of leasehold estate based on rent stream) Option III - $4,500,000.00 (value of improvements + full rent stream) Scenario A The market is up Fair market value of lease (FMV): Total value of the remaining term under the lease: Rent no longer required to pay: Present value of improvements (PVI): Total loss: $125,000.00 a year (FMV x [remaining term + option]) _( )_ (annual rent x [remaining term + option]) (Value of improvements - depreciation) (Value of lease rent not paid + PVI) Scenario B The market is down FMV: $90,000.00 a year Total value of the remaining term under the lease: Rent no longer required to pay: _( )_ PVI: Total loss: Scenario C Who is my landlord? Same fact pattern as Scenario B, but: Up to Eviction rent was paid to wrong party Actual fee owner insists on removing improvements Rent to be paid to actual landlord: $500,000.00 Expenses to return land to original condition: $250,000.00 Total loss from Scenario B: Total loss: Exhibit C Work Sheet Page 7 of 9
Scenario D The ultimate nightmare Same fact pattern as Scenario C, but: Assume the property is used as a steel processing plant Lease includes provisions for additional improvements by tenant after 5 years Value of unfinished improvements: $500,000.00 Soft costs (design costs & permits): $150,000.00 Transportation costs: $200,000.00 Reasonable cost for relocation of Personal Property: $1,000,000.00 Costs to secure replacement lease (broker fees, legal fees): $150,000.00 Total loss from Scenario C: Total loss: Exhibit C Work Sheet Page 8 of 9
About the presenter Yosi (Joe) Benlevi is Senior Underwriting Counsel with Chicago Title Insurance and Ticor Title Insurance Companies. He underwrites complex multi-site, multi-state commercial transactions, including shopping malls and power plant transactions, and handles the complicated structuring and underwriting issues of such transactions. Prior to joining Chicago/Ticor Title, he headed the legal department of one of the largest title agents in New York State and managed its legal staff. Joe published numerous articles related to commercial law and title insurance and lectures frequently to a variety of audiences on title related topics. Prior to working in the title industry Joe practiced law in an Israeli law firm specializing in commercial law and securities. Joe is admitted to practice law in New York and Israel, holds an LLB and LLM degrees from Tel-Aviv University and is a member of the New York State Land Title Association Legislative Committee. About the presenter Page 9 of 9